China data to push dollar higher

The strongest result for Chinese manufacturing activity in 13 months is expected to further boost the Australian dollar, as demand recovers in our biggest export market.

The HSBC PMI, an early indicator of manufacturing conditions in China, was at 50.4 in November – indicating a return to expansionary conditions.

It comes as China economists forecast growth for the world’s second largest economy to be above 8 per cent in 2013, a dynamic which supports Australian exports.

Strategists said the ongoing recovery in manufacturing also spelled ongoing support for the currency, adding to the symbolic boost the Australian dollar received this week after the International Monetary Fund said it would consider including it among global reserve currencies.

HSBC’s Greater China economist Donna Kwok said the positive November result for manufacturing continued a trend from the end of the third quarter.

“The key takeaways are domestic demand continuing to strengthen while the destocking process appears to have ended," she said.

“Manufacturers are starting to stock up on inputs again, so we’re comfortable with our call of over 8 per cent [GDP growth] for the fourth quarter."

Ms Kwok is forecasting 7.8 per cent economic growth for China this year and 8.6 per cent next year, driven by infrastructure investment, domestic tax changes and subsidies that would help domestic demand.

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The HSBC economist said China’s greatest medium-term challenges would be reacting to any adverse developments in major export partners, Europe and US.

America is grappling with the prospect of a hit to growth from legislated tax hikes and spending cuts, with Europe’s sovereign debt crisis dampening the continent’s import demand.

While Chinese authorities could further stimulate the economy to offset these headwinds, Ms Kwok said they were cautious about the risk of over-inflation.

ANZ’s chief economist for Greater China, Li-Gang Liu, said the positive November result for the HSBC Flash PMI was significant, as the survey had a large component of small and medium-sized firms compared to the official PMI.

The official PMI had already moved above 50 in September and October, suggesting the overall manufacturing sector has returned to expansionary territory.

“This means all segments of Chinese manufacturing sector have returned to an expansion mode," Mr Liu said.

“We believe this trend will continue towards [the second quarter] of next year.

“China’s growth could rebound to 8 per cent in the fourth quarter and stay at 8.1 per cent next year, with the risks on the upside."

Incoming premier Li Keqiang had emphasised that urbanisation would be a key driver for growth.

The ANZ economist said this meant Chinese investment would remain robust in the next three years while the economy rebalanced towards consumption-driven growth. “We think inflation will be a risk in the second half next year, led by rising food prices and high imported commodity prices," he said.

The return of growth to Chinese manufacturing represents another source of support for the Australian currency, which has appeared immune to falls in commodity prices this year.

“The PMI at around 50 is not particularly high, but at 52 to 53 it would support reasonably firm demand [for the currency]," he said.

“The pool of AAA-rated assets [globally] is dwindling and the Aussie is a simple story to tell [underpinned by a solid economy]."

Commonwealth Bank economists said a stronger currency would continue to challenge industries such as domestic manufacturing, tourism and export. They pointed to the risk that ongoing rises in the dollar would outstrip commodity price growth – representing a tightening of policy settings.